I suspect that Mr. Timi Soleye’s guest post of this title in FT’s “Beyond Brics” of 22nd October and the back page of BusinessDay of 23rd October was published more than anything else for its literary style, which reinforced the stereotype of Nigerian public sector chaos and failure.
Mr. Soleye made a dubious comparison between power and ports and asserted with magisterial certainty that the 2013 power sector privatisation is collapsing. He then concluded, counter-intuitively, that investments in the very industry that is collapsing “will be a good bet in the short and long term”. I concur with his conclusion. With all else he said, I disagree. Alas, in rebuttal, I cannot match Mr. Soleye’s literary skills, so I must better focus on the facts.
First, the privatisation exercise from start to finish was not chaotic. Indeed, it is universally acknowledged to have been one of the most transparent and comprehensive ever implemented anywhere, despite its size and complexity in the face of virulent opposition by powerful proponents of the destructive status quo.
Second, successful core investors were aware of the condition of the assets they bought. I attended many investor meetings in and outside Nigeria, along with very senior officers of the BPE. We answered many searching questions at these events and always made frank disclosures. This is quite apart from the electronic and physical data rooms that transaction advisers made available.
One important disclosure was that the published data on aggregate distribution losses were wrong. It was expressly agreed with investors, therefore, and stated in the relevant Tariff Orders issued by NERC, that rather than take another year to establish credible loss data, transactions would proceed and we would work around the uncertain loss numbers. After takeover, a loss revalidation audit would be carried out. This is precisely what has been done in the past 10 months.
It is also untrue that licensees do not own buildings housing their equipment. I should know. Mr. Soleye and/or his informants should know the difference between a Disco substation, which is wholly owned and part of the Disco’s regulated asset base, and an administrative building, which does not need to be owned and could be rented. The latter are indeed rented, having been handed over, along with various other non-operational assets, by the FG to Nigerian Electricity Liability Management Company Ltd (NELMCO) in return for the FG taking all accumulated liabilities off the balance sheets of the privatised electricity companies.
Not one industry agreement has been scrapped. These agreements had been unsigned for years. They were each extensively re-negotiated and executed by new owners with various conditions for effectiveness, none of which were met during the era of state ownership. It was understood that the arrival of private ownership would see a concerted push towards contract effectiveness and readiness, all in recognition of the need for the NESI’s orderly evolution of towards the declaration/commencement of the Transitional Stage Electricity Market (TEM).
The Electricity Market Rules, available at www.nercng.org, embody recognition. In place since 2010, they aggregate the peculiar experience of Nigeria, best international electricity market operations practice and our reform objectives. Together with the Grid Code, they constitute very clear rules of the road for the commercial/financial and technical operations of a steady-state Nigerian Electricity Supply Industry (NESI) and its evolution over time. The Market Operator is one of the NESI’s two central market functionaries (the other is the System Operator). We have had both in Nigeria since 2008. To describe either as “shadowy” is quite simply to display ignorance about the NESI.
The raison d’etre for the Interim Rules, therefore, is to provide for the post-privatisation period BEFORE TEM was declared. They were not enacted by NERC “two months after the handover”. Neither were they “introduced by fiat”. They were drafted by NERC, jointly with the privatisation agency, the BPE, in July/August 2013, well before privatisation transactions were concluded. The need for them was anticipated, fully discussed by all stakeholders, including new owners, and understood by all concerned before they came into effect (remember my earlier reference to a work around).
Stakeholders understood and accepted beforehand that there would be shortfalls and losses for a time and that a defined and feasible path towards repaying these shortfalls would be determined, agreed and implemented before the Transitional Stage Market commences. The NESI is now in this stage of closing out the Interim Rules Period and repaying all shortfalls/losses.
This repayment will happen via a remarkable process of inter-governmental cooperation and collaboration between the Federal Ministries of Power and Petroleum Resources, the Central Bank of Nigeria and NERC. Together, the 4 MDAs have agreed a three-part NESI Bankability Strategy that revolves around raising a facility to pay off all shortfalls, dealing with the commercial elements of gas supply risk and ensuring NESI business continuity and viability, using a combination of policy, regulatory and financial sector instruments.
The Interim Rules, instead of collapsing, have proved to be resilient and vital to the continuity of electricity business in the country. They will phase out in an orderly manner, as intended by the industry that put them together, made them effective and has depended on them these past 11 months.
For Nigerian banks, the uncertainty of 2013, when they raised acquisition finance for core investors, is increasingly giving way to certainty and confidence. What they have seen and heard from policy makers and regulators and the transactions that they are now participating in demonstrate that this sector is viable and the concerted work of reform now ongoing is producing a NESI that can only get better. They will be slow and tentative but they will come round eventually.
Mr. Soleye’s solutions are based on faulty assumptions and he really needs to understand the NESI a lot better. NERC’s statutory mandate is to set cost-reflective tariffs. For as long as Nigeria’s 11 primary Discos are monopolies, market principles will be moderated by fair and balanced technical (HSE, construction, installation, operations) and economic (tariff, market power, procurement) regulation, just as is done in every country that has a private sector-owned electricity industry. The objective, of course, is to ensure that consumers receive quality service for the tariffs they pay. NERC has been on this road for quite a while now and I daresay that stakeholders (government, players and consumers) have become comfortable with this reality.
So, who is Mr. Soleye’s “discerning investor”? 10 private sector-led core investor groups made up of Nigerians with foreign technical partnerships, backed largely by Nigerian capital are not discerning enough? At this moment, only Nigerians – policy-makers, regulators and owners – have the time, patience and incentives to take this electricity market in hand and turn it around into something that, for the first since the Electricity Corporation of Nigeria was formed in 1951, does not merely serve only the elite or act as a brake on national development; but rather is actually a primary catalyst for the growth of Nigeria into the socio-economic powerhouse that Africa needs. Once TEM starts, electricity companies get turned around and they undertake the IPOs that they are contractually committed to, we will truly know who the “discerning investors” are.
Power sector reform in Nigeria has come this far only because it is clear-sighted, policy-driven and backed by strong political will. We have no illusions that it will be a walk in the park or that the day after privatisation or even TEM the lights will turn on, stay on and everybody is happy. Yet, because of what was done yesterday, what is being done today and what will be done tomorrow, I can say that the day will surely come. I will end with my own Churchillism: “Now, this (NESI evolution into TEM) is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Whatever interests he seeks to serve by his polemic, Mr. Soleye must be told that his prediction is off the mark by a very long chalk. Much as he would like to see it happen, Nigeria’s electricity sector reform programme and the privatisation of FG-owned electricity companies will not collapse.
Eyo O. Ekpo
